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Tuesday, December 25, 2007

Developing Effective Habits with Economics

More recently, they have used behavioral experiments to raise economics to the level of common sense (no mean feat) and perhaps beyond.

One of my favorite examples: Participants in an experiment were offered a choice of films to watch. Depending on whether the film was to be watched immediately or in a few days, the subjects chose something light, like Mrs. Doubtfire, or something character-building, such as Schindler's List. When offered the chance to change their minds at the last minute, many who had signed up for a highbrow experience buckled and grabbed something less challenging.

Daniel Read, one of the researchers and an economist at the London School of Economics, told me that he caught himself behaving in exactly the same way. He subscribed to a film-rental service and kept rearranging his favorites so that highbrow films never quite reached the top of the waiting list.

These lapses are not rational. But we can still be rational in anticipating them and taking steps to pre-empt them.

Karlan, one of the men behind Stickk.com, discovered this firsthand in his day job, in which he researches the effectiveness of small financial institutions in poor countries. With two colleagues, he designed a new savings product for a small rural bank in the Philippines called SEED: "Save, Earn, Enjoy Deposits." SEED savings accounts paid the standard rate of interest but would not allow withdrawals until either a specified date had passed or a specified amount had been saved. (There were exemptions, for example, a documented medical emergency, but no savers took advantage of them.)

Karlan surveyed some of the customers, asking hypothetical questions designed to reveal indirectly the sort of preferences that might indicate a self-control problem. He found that women (not men) whose responses suggested a lack of self-control were also more likely to open a SEED account. And a randomized trial found that the SEED accounts did substantially boost saving.

In other words, when we need help with self-control, we tend to know it. I certainly did. Two hundred sit-ups a week might not sound like a lot, but it is 200 more than I was doing before. And I can say for certain that if my money hadn't been on the line, there's no way I'd be sticking to it.